Vertical Integration, Missing Middle and Investor Protection in Developing Countries

Rocco Macchiavello

No 373, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: The industrial organization of developing countries is characterized by: (i) pervasive use of subcontracting arrangements among small firms, (ii) "missing middle" in the firm size distribution, and (iii) financially constrained firms. This paper studies an incomplete contract model in which the integration decision is chosen to maximize the returns of two vertically related projects to an external investor. The model jointly determines the financing, size and organization of firms. Vertical integration trades-off the benefits of joint liability against the cost of rendering the supply chain more opaque from the point of view of investors. The model shows that vertical integration is more likely to arise for intermediate levels of investor protection and that better contract enforcement reduces vertical integration only if financial markets are sufficiently developed. Moreover, the firm size distribution is more likely to display a missing middle in industries which favor vertical integration. The model sheds light on the industrial organization of developing countries showing that the motives for vertical integration are not necessarily higher in those countries.

Keywords: Vertical Integration; Missing Middle; Industrial Development; Financial Constraints; Joint Liability; Trade Credit; Community Based Industries (search for similar items in EconPapers)
JEL-codes: D23 G30 L22 O12 O16 (search for similar items in EconPapers)
Date: 2007-11-01
New Economics Papers: this item is included in nep-dev, nep-ore and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://ora.ox.ac.uk/objects/uuid:49c3f092-bd72-4329-abe4-d09f6c592f92 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oxf:wpaper:373

Access Statistics for this paper

More papers in Economics Series Working Papers from University of Oxford, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Anne Pouliquen ( this e-mail address is bad, please contact ).